The invisible world of clearing: A look behind the scenes of financial transactions

In such contexts, people used to speak of the so-called “billing”. Today, so-called clearing plays a central role in the complex world of financial transactions. It is, so to speak, the invisible but indispensable henchman who ensures that enormous sums of money are moved between the various market participants in the background every day. These money movementsare so big and so numerous that they would no longer be manageable by easy handling. Instead, highly developed, extremely complex computer programs are used, which take on the task of resolving and balancing the various claims and liabilities. The system of clearing is therefore the technological basis on which the smoothprocessing of the billions of financial flows worldwide, without having to manually check every single money transfer in detail.

An everyday example of clearing

In order to make the clearing process understandable, a simple example can be used that clearly explains the process in a small community. Let’s imagine a hiker leaving a deposit of 100 euros at the innkeeper of an inn called “Zum Löwen”. The host takes the money and rushes to his beverage supplier to receive an open invoicepay. However, the beverage supplier is still in debt to a local butcher, who in turn still has outstanding claims from the meadow farmer. He can now finally redeem his beer mat at the “Löwen”. In the afternoon, the hiker returns and takes the money back, but through all these transactions, the villagers have now become debt-free because all the claims andliabilities were offset. This simple example shows how the principle of clearing works: It compensates for claims and debts, so that in the end no more money flows, but only offsetting. A corresponding computer program would represent precisely these processes in such a way that all receivables and liabilities are fully balanced, withoutthat money actually changes hands.

The model of the balance

In reality, it is sometimes the case that individual actors still have outstanding claims, while others have already accumulated more debt. The system of clearing then ensures that only the differences are compensated, i.e. the so-called “peaks” in the claims or debts that still exist. For example, if the landlord is still 100 euros inThe chalk is standing, but at the same time still receiving 50 euros from the butcher, then the clearing system would structure these overhangs in such a way that only the difference is compensated. In the example, the farmer, i.e. the meadow builder, would be able to compensate for his debts to the butcher by offsetting against the claims against the host. The system would be two transfers in the amountof 50 euros each: One from the innkeeper to the beverage supplier and another from the butcher to the beverage supplier. The result is a balanced flow of money, in which only the actual differences are moved – the so-called balancing procedure. This principle is the heart of the clearing and ensures that in a complex network of demands andOnly the necessary payments are made without all those involved actually having to transfer money.

The magnitude in the global financial system

In the world of financial markets, such clearing processes are of course commonplace, but their importance is often underestimated. The orders of magnitude are almost unimaginable: Every day, transactions totaling several trillion US dollars are settled on international foreign exchange markets, while at the same time equity transactions with a volume of hundreds of billions of dollarsClearing systems are processed. These enormous sums are managed by sophisticated programs that offset and offset the transactions in fractions of a second. The system is so efficient that hardly anyone notices the exact process behind the scenes. For most people, it is simply a technical need that runs in the background and forthe stability of the global financial economy. Nevertheless, understanding this process is important to better understand the financial system’s processes and to recognize the risks associated with it.

Debates about the clearing system

However, the term clearing is not always positive in the public debate. There are situations in which the system is the focus of economic policy discussions. The so-called target system, which stands for Trans-European Automated Real-Time Gross Settlement Express Transfer System, is particularly well-known. This system is used by the European Central Bankoperated and serves fast and cross-border payment transactions within Europe. Critics, especially from the neoliberal direction, have discussed the way Target and its possible consequences have been controversial. It is claimed that the system is used to solve the financial problems of the euro crisis countries at the expense of Germany. In this scenario, Germanyassociated with claims against other countries that are constantly growing through the ECB’s payment system without ever fully resolving these claims. Instead of real debt repayment, only debts would be postponed, which can become a burden for the entire eurozone in the long term. This scenario shows, like the system of clearingcan become an instrument that exacerbates political and economic conflicts instead of solving them.

Risks and risks in the financial system

In addition to Target, there are other constructions, some of which can be just as problematic in the financial system. One of them is special purpose entities that are often used to disguise certain financial transactions or to pass risks to other actors. Such structures can significantly impair financial market transparency and, in the worst case, causerisks are no longer clearly recognizable. Although the system of clearing is fundamentally a technical necessity, it also harbors risks when speculation, manipulation or uncontrolled shifts in debt are involved. It is therefore important to understand the mechanisms behind these systems and to critically question their functioning in order tosecure financial system in the long term. The complexity of such structures sometimes makes it difficult to recognize the actual risks and there is a risk that a collapse of individual elements could have serious consequences for the economy as a whole.